How to buy Stacks (STX)?

Bitcoin was created in 2008 by an anonymous computer scientist called Satoshi Nakamoto. It revolutionalised money by creating decentralised, digital cash. But it sure is old: more than a decade later and the network is teeth-grindingly slow compared to its rivals, and lacks one major innovation that Ethereum and later blockchains made popular: the smart contract.

The smart contract is a bit of code that runs on top of a blockchain network; it powers decentralised applications like lending protocols and decentralized cryptocurrency exchanges. The genius of the smart contract is that it uses the decentralisation of the blockchain—the fact that no single entity validates transactions on the network, but instead a vast international group of anonymous actors—and uses it to power autonomous applications that don’t require intermediaries.

Stacks, formerly known as Blockstack, is a programmable blockchain network that takes one of the best bits about Bitcoin—its decentralisation and well-trusted security—and uses it to power a platform backed by the best bit about Ethereum, the smart contract.

Using Bitcoin’s security is a big deal because on blockchains, security is cumulative, and the result of powerful network effects. If you can prove that a network hasn’t been hacked in over a decade, or even suffered any downtime, it’s likely more secure than a security system that’s been cooked up in the past couple of months. Bitcoin’s also the largest blockchain network, and has the most amount of power backing it.

Stacks inherits something called proof-of-work, the mechanism that powers Bitcoin. Proof-of-work is how all these different actors on the Bitcoin network validate transactions. Each computer runs a piece of number-crunching software, and the computers race to solve a complicated maths equation. Since this puzzle can only be solved by brute force, the most powerful computer wins, and is rewarded in Bitcoin for doing all of this work. This is an energy-intensive process, but it’s kept the Bitcoin blockchain ticking since it went live in early 2009.

Stacks uses Bitcoin to capitalise on this network effect: it believes that “the world is converging on Bitcoin, and demand for use cases around Bitcoin is increasing.” So, “instead of competing with Bitcoin’s underlying protocol, Stacks builds on and extends Bitcoin.” If you can’t beat ‘em, join ‘em. It also relies on Bitcoin’s settlement resources: that once something is on the Bitcoin, it can’t be taken down.

However, Stacks doesn’t use proof-of-work directly. Instead, it connects to Bitcoin through something called proof-of-transfer, the blockchain’s own consensus mechanism whereby miners pay in Bitcoin to receive freshly minted Stacks tokens. This allows for Stacks transactions to be settled on Bitcoin. The idea is that all of the Bitcoin in circulation today is the result of hard work completed by Bitcoin miners. Proof-of-transfer interprets that Bitcoin as a consequence of all the hard work, and uses it to process transactions on the Stacks blockchain. Miners on Stacks take the work that miners on Bitcoin have already done, and use it to create new Stacks tokens. It calls these reused Bitcoins “proof of computation.”

Because the Bitcoin blockchain is slow, Stacks also uses something called “microblocks” to speed things up. Microblocks are blocks that are mined between Stacks blocks. Applications on the Stacks blockchain are written in Clarity, a smart contract platform that’s comparable to Solidity on Bitcoin. Algorand, another blockchain, also uses Clarity. Data is also encrypted by default, meaning that any applications that generate or save data on the Stacks blockchain do not resell that data.

Applications on Stacks

Using all this technology, developers have created complex applications that are backed by Bitcoin’s security. Among them is stxnft, an app that lets you create non-fungible tokens (or NFTs) that are settled on the Bitcoin blockchain. Stacks is not the first to create these Bitcoin NFTs—indeed, the first went live around 2013 on something called Counterparty—but the Stacks blockchain is one of the first to create complex NFTs using smart contracts on Bitcoin.

Another is Stackswap, a decentralized exchange that lets you swap in and out of tokens on the Stacks blockchain. You can’t swap Bitcoin here, but you can swap tokens minted by other decentralised applications, like miamicoin, NewyorkCityCoin and USDA. There are a few dozen such apps. They mostly do the same things that you can do on decentralised applications hosted on other blockchains, but the distinguishing aspect is that these are all backed by Bitcoin.

The Stacks token (STX)

The whole blockchain is powered by Stacks, also known as STX. It’s a fungible token that you can trade on cryptocurrency exchanges, or hold for speculative purposes. It’s also issued as a reward for validating transactions on the Stacks blockchain.

The token was sold in the first SEC-qualified token sale in 2019. The sale raised $23 million. The sale raised $15.5 million in a Regulation A+ sale to retail investors, and another $7.6 million by selling to overseas investors through Regulation S.

Blockstacks launched in 2013, the creation of Muneeb Ali, a Pakistani computer scientist and Princeton PhD, and Ryan Shea, an entrepreneur and angel investor. Further backing from investors like Y Combinator, Digital Currency Group and Winklevoss Capital brought the total funding to around $75 million.

The token wasn’t listed on major US cryptocurrency exchanges, one of the largest markets, until the start of 2021. The founders wanted to play things safe; lots of other initial coin offerings (ICOs) from around the same time eventually resulted in action from the US Securities and Commission Exchange. Taking things slow allowed them to develop the protocol.

The reason why it could be listed on US crypto exchanges is that the company that developed Stacks stopped trading and mutated into an non-profit organisation called the Stacks Foundation. This coincided with the launch of Stacks 2.0, which upgraded the blockchain. US securities law makes it tricky for companies to operate cryptocurrency projects, but lawyers often advise that decentralising the whole project, such that no single entity can be considered to be responsible for the blockchain, gets around some of the problems.

It was only after the launch of Stacks 2.0 that the STX token began to shoot up in price. It rose from $0.145 at the end of October 2020 to $0.475, before hitting $2.7 in April 2021, and then peaking at its current all-time high (as of November 2021) to $3.61.

How to buy STX

There are several ways to buy the Stacks token. You can buy it on the Stacks blockchain through a decentralised exchange; you can buy it on a regular cryptocurrency exchange, or you can earn it on Stacks by becoming a miner

To buy it on a cryptocurrency exchange, you have to first find one that offers it. Several major exchanges, including Binance, Kuoin and Okcoin, list STX. Coinbase does not offer it, and neither does Wealthsimple (which, technically, is a brokerage rather than an exchange).

You can check the largest markets for Stacks on price aggregator sites like CoinMarketCap or CoinGecko. As of this writing, CoinMarketCap shows that Binance has the largest markets for STX trading. Its USDT pairing accounts for 11.67% of the trading volume alone. USDT is a stablecoin (controversially) pegged to the US dollar.

Different exchanges might offer slightly different prices, but arbitrage traders—traders who profit off tiny differences like these—keep the prices in check to avoid things from diverging too much. The prices listed on exchanges reflect the price of the most recent trade. Decentralized exchanges, like Uniswap (or for Stacks, Stackswap) work slightly differently: they have no order books so generate prices by referring to oracles, which grab prices from lots of different sources to keep the prices of STX tokens accurate).

To buy STX on a regular cryptocurrency exchange, you’ll have to first create an account. This involves providing some form of identification, like a driver’s licence or passport, and then waiting until the exchange gives you the green light to trade. Occasionally, you might have to pass more stringent checks, but generally, this doesn’t involve anything more strenuous than providing a selfie video. These exchanges are online-only: there’s nothing comparable to a bank branch to visit, and several exchanges don’t even have call centres full of dedicated support staff.

Once you’re in, you’ll need to pony up the funds with which you plan to buy your STX tokens. There are two ways of doing this. The first is to buy STX tokens with another cryptocurrency, and the second is to buy them with a fiat currency (regular money, like the Canadian dollar). Because STX is a relatively small token—its market capitalisation of about $2.8 billion dollars makes it the 62nd largest cryptocurrency on the market— some exchanges have not bothered to list it directly for the Canadian dollar.

This is a slight inconvenience, but not a great one. To get around this, you have to buy a cryptocurrency that is paired against the Canadian dollar or another fiat currency, and then use that to buy STX tokens. For instance, on OKEx, you’d have to first deposit your Canadian dollars by wiring them from a bank account, and then using them to buy USDT, a stablecoin pegged to the US dollar that happens to be paired with the Canadian dollar. To buy USDT, or another large cryptocurrency, you select it on this site and pay with a wire or Interac transfer, with a credit or debit card, or with Apple or Google Pay. Then you’ll have USDT in your OKEX account.

You can use this USDT to buy STX tokens on OKEx, or withdraw it to another exchange and buy the STX there. Note that withdrawing funds to external wallets, such as those on another exchange, incurs withdrawal fees; it’s often cheaper to buy on the same exchange. Exchanges also charge trading fees, and some, but not most, charge deposit fees. Trading fees on the major exchanges are not particularly high; in most cases under 1%.

The cheapest way to trade is directly on the trading desk of the exchange. This may look daunting, and you may feel like a stockbroker, but it cuts down on ‘convenience’ fees charged by exchanges’ brokerage services. To buy it at its current price, you’re looking for a ‘spot’ trade, or at the ‘market’ rate. Other options, like limit trades, let you buy or sell the STX token when it reaches a certain price. Trades on cryptocurrency exchange are usually instantaneous because they happen outside of blockchains; instead, you’re really interacting with the equivalent of a very complicated Excel spreadsheet that works out who owns what.

All this is ‘centralised’, which puts it in opposition to one of the foundational problems of the blockchain. This creates a risk: exchanges often have spotty insurance policies, are scarcely regulated and deposits are not protected by government deposit schemes (like banks). For this reason, it’s generally advisable to take your funds away from the exchange and self-custody them, or place them with a custodian who is responsible for looking after them safely.

To self-custody your funds right on the blockchain, you have two options. The first is to move them to a wallet that’s connected to the internet. This is also known as a hot wallet. Stacks has its own wallet, created by Hiro, the company that was formerly known as Blockstack (and separate to the non-profit). It’s called Hiro Wallet, and you can use it to connect with decentralised applications. This is very convenient, but the risk is that someone logs into your computer while you’re not looking, or remotely through malware, and steals your funt.

The alternative is the cold wallet. These are small devices that plug into your computer whenever you want to use them, but otherwise remain unconnected to the internet. The most popular ones are Ledger and Trezor.

These solutions avoid the risk that cryptocurrency exchanges present, but they are not watertight; they are the cryptocurrency equivalent of stashing your money under the mattress. If you lose access to your cold or hot wallet’s secret phrase (the equivalent of a backup password), you won’t be able to retrieve your funds. This is a harsh lesson to learn for first-time crypto investors, and companies like Robinhood have named this as the reason why they are so hesitant to let people withdraw their money to separate wallets. However, in the wild west of the crypto market, managing your risk appropriately is an important part of investing.